DBRS Morningstar Confirms Rating on Class A Notes of Diana SPV S.r.l. at BBB (sf), Negative Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed its rating on the Class A notes issued by Diana SPV S.r.l. (the Issuer) at BBB (sf) with a Negative trend.

The transaction entails the issuance of Class A, Class B, and Class J notes (collectively, the notes) backed by a mixed pool of Italian nonperforming secured and unsecured loans originated by Banca Popolare di Sondrio S.C.p.A.

The gross book value (GBV) of the loan pool was approximately EUR 999.7 million as of the 1 April 2019 economic effective date. The securitised portfolio is mostly composed of secured loans, representing approximately 67.8% of the GBV. Of these loans, approximately 95.5% by GBV benefit from a first-ranking lien mortgage and the remaining 32.2% by GBV represent unsecured loans.

At the economic effective date, the portfolio mainly comprised corporate borrowers (78.5% by GBV) and the properties securing the loans in the portfolio mainly comprised residential properties (44.4% by updated real estate value). The secured collateral was highly concentrated in Northern regions of Italy (84.4% by updated real estate value) with Lombardy representing 74.5% by real estate value.

Prelios Credit Servicing S.p.A. (Prelios or the Servicer) services the receivables. A backup servicer, Securitisation Services S.p.A., was also appointed.

RATING RATIONALE
The confirmation follows a review of the transaction and is based on the following analytical considerations:
-- Transaction performance: assessment of portfolio recoveries as of 30 November 2020, focusing on: (1) a comparison between actual collections and the Servicer’s initial business plan forecast; (2) the collection performance observed over the past months, including the period following the outbreak of the Coronavirus Disease (COVID-19); and (3) a comparison between the current performance and DBRS Morningstar’s initial expectations.
-- Updated business plan: the Servicer’s updated business plan as of November 2020, received in March 2021, and the comparison with the initial collection expectations.
-- Portfolio characteristics: loan pool composition and evolution of its core features since issuance.
-- Transaction liquidating structure: the order of priority entails a fully sequential amortisation of the notes (i.e., the Class B notes will begin to amortise following the full repayment of the Class A notes and the Class J notes will amortise following the repayment of the Class B notes). Additionally, interest payments on the Class B notes become subordinated to principal payments on the Class A notes if the cumulative gross collection ratio or present value cumulative profitability ratio are lower than 90%. According to the Servicer, these triggers were 129.6% and 102.3%, respectively, and were not breached on the December 2020 interest payment date.
-- Liquidity support: the transaction benefits from an amortising cash reserve providing liquidity to the structure covering against potential interest shortfall on the Class A notes and senior fees. The cash reserve target amount is equal to 4.5% of the Class A notes principal outstanding and is currently fully funded.

According to the latest payment report of December 2020, the outstanding principal amounts of the Class A, Class B, and Class J notes were equal to EUR 169.4 million, EUR 35.0 million, and EUR 3.7 million, respectively. The balance of the Class A notes has amortised by approximately 27.9% since issuance. The current aggregated transaction balance is EUR 208.0 million.

As of November 2020, the transaction was performing above the Servicer’s initial expectations. The actual cumulative gross collections equalled EUR 71.4 million, whereas the Servicer’s initial business plan estimated cumulative gross collections of EUR 57.8 million for the same period. Therefore, as of November 2020, the transaction was overperforming by EUR 13.6 million (23.5%) compared with initial expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections of EUR 55.4 million at the BBB (sf) stressed scenario for the same period. Therefore, as of November 2020, the transaction is performing above DBRS Morningstar’s initial stressed expectations.

In March 2021, the Servicer provided DBRS Morningstar with a revised business plan. In this updated business plan, the Servicer assumed recoveries that are slightly below initial expectations. The total cumulative gross collections from the updated business plan account for EUR 393.8 million, which is 0.7% lower than the EUR 396.7 million expected in the initial business plan.

Without including actual collections, the Servicer’s expected future collections from December 2020 now account for EUR 322.4 million (EUR 338.9 million in the initial business plan). Hence, the Servicer revised its expectation for collection on the remaining portfolio downwards. The updated DBRS Morningstar BBB (sf) rating stress assumes a haircut of 25.8% to the Servicer’s latest business plan, considering future expected collections.

The final maturity date of the transaction is in December 2038.

DBRS Morningstar analysed the transaction structure using Intex DealMaker.

The coronavirus and the resulting isolation measures have resulted in a sharp economic contraction, increases in unemployment rates, and reduced investment activities. DBRS Morningstar anticipates that collections in European nonperforming loan (NPL) securitisations will continue to be disrupted in the coming months and that the deteriorating macroeconomic conditions could negatively affect recoveries from NPLs and the related real estate collateral. The rating is based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus. For this transaction, DBRS Morningstar incorporated its expectation of a moderate medium-term decline in property prices; however, partial credit to house price increases from 2023 onward is given in non-investment-grade scenarios. The Negative trend reflects the ongoing uncertainty amid the coronavirus.

On 16 April 2020, DBRS Morningstar published a set of macroeconomic scenarios for the 2020–22 period in select economies. These scenarios were last updated on 17 March 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/375376/global-macroeconomic-scenarios-march-2021-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

For more information on DBRS Morningstar considerations for European NPL transactions and Coronavirus Disease (COVID-19), please see the following commentaries: https://www.dbrsmorningstar.com/research/362326 and https://www.dbrsmorningstar.com/research/360393.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at: https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: “Master European Structured Finance Surveillance Methodology” (8 February 2021).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: http://www.dbrsmorningstar.com/about/methodologies.

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for this rating include the Issuer and/or its agents, which comprise, in addition to the information received at issuance, the updated business plan from the Servicer received in March 2021, updated semiannual and quarterly servicer reports as of November 2020 and February 2021, and the investor report as of December 2020.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial rating, DBRS Morningstar was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the rating process.

This is the first rating action since the Initial Rating Date.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios, as compared with the parameters used to confirm the rating (the base case):

-- Recovery Rates Used: Cumulative base case recovery amount of approximately EUR 239.1 million at the BBB (sf) stress level, a 5% and 10% decrease in the base case recovery rate.
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would lead to a downgrade of the Class A notes to B (High) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would lead to a downgrade of the Class A notes to CCC (sf).

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Sebastiano Romano, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 17 June 2020

DBRS Ratings GmbH
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrsmorningstar.com/about/methodologies.

-- Rating European Non-Performing Loans Securitisations (13 May 2020), https://www.dbrsmorningstar.com/research/360970/rating-european-non-performing-loans-securitisations.
-- Legal Criteria for European Structured Finance Transactions (6 April 2021), https://www.dbrsmorningstar.com/research/376314/legal-criteria-for-european-structured-finance-transactions.
-- Master European Structured Finance Surveillance Methodology (8 February 2021), https://www.dbrsmorningstar.com/research/373435/master-european-structured-finance-surveillance-methodology.
-- Rating European Consumer and Commercial Asset-Backed Securitisations (3 September 2020), https://www.dbrsmorningstar.com/research/366294/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- European RMBS Insight Methodology (2 April 2020), https://www.dbrsmorningstar.com/research/359192/european-rmbs-insight-methodology.
-- European RMBS Insight: Italian Addendum (21 December 2020), https://www.dbrsmorningstar.com/research/371597/european-rmbs-insight-italian-addendum.
-- European CMBS Rating and Surveillance Methodology (26 February 2021), https://www.dbrsmorningstar.com/research/374399/european-cmbs-rating-and-surveillance-methodology.
-- Operational Risk Assessment for European Structured Finance Servicers (19 November 2020), https://www.dbrsmorningstar.com/research/370270/operational-risk-assessment-for-european-structured-finance-servicers.
-- Derivative Criteria for European Structured Finance Transactions (24 September 2020), https://www.dbrsmorningstar.com/research/367092/derivative-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (28 September 2020), https://www.dbrsmorningstar.com/research/367292/interest-rate-stresses-for-european-structured-finance-transactions.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021), https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrsmorningstar.com/research/278375.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].